CFTC abandons its position limits appeal

Good for them. It hardly makes sense (economically or practically) for the Commodity Futures Trading Commission to pursue an appeal from a federal district court decision invalidating an earlier CFTC rule on speculative position limits, adopted as part of the Dodd-Frank Act implementation, when it is on the cusp of enacting new rules on the subject that (hopefully) will pass muster in the courts.

I began my legal practice in the 1960s when speculative position limits were taken for granted. The Government set limits for farm futures and the exchanges did the rest. There were occasional debates over whether the caps were correct, but never over the need to control concentration of market power that massive holdings of futures position in the hands of speculators could create (hedgers were exempted if they could verify a genuine risk-management purpose).

And, as outside counsel to what was then the world's largest agricultural futures market, I was eye witness to the support for this policy within the farm community. If anything, the agricultural sector thought that the limits were too generous.

But Dodd-Frank has introduced a new culture: The idea that things are "different" today. Congress was persuaded to treat "swaps" differently from the futures contracts and options despite being economically virtually the same (and often substitutes for those long-regulated instrument). No wonder that traditional practices like spec limits are now viewed as unwarranted intrusions. Reportedly, even the ag folks have voiced concerns about the upcoming rule. One would think that pre-existing programs that worked well (and uncontested) for generations are immune to attack. But that was then; this is now.

What is remarkable about the CFTC's second effort to enact new spec limit rules, thanks to Dodd-Frank, is that it is even necessary. The law wanted to concentrate all spec limits authority in the federal government, slamming the door on exchange participation in that process. The resulting legal chaos is reminiscent of, well, the ObamaCare roll-out.